Border Tax Adjustments: Financial Impacts on U.S. Business
For business, Border Tax Adjustments are the most controversial aspect of the plan for corporate tax reform championed by Republicans in the U.S. House of Representatives.
Their Blueprint envisions far-reaching changes in business taxation. Taxes would be levied on cash flow earned in the United States (revenues minus the cost of inputs and wages) rather than on global business profits. The corporate tax rate would drop to 20 per cent. Companies would be allowed to deduct the full cost of equipment in the year of purchase. Border Tax Adjustments (BTAs) would also be introduced, allowing a tax exemption for revenues earned from exports but denying businesses the ability to write off expenses incurred on imports.
BTAs are strongly supported by business leaders from many of America’s largest manufacturing companies. They are just as adamantly opposed by the country’s retailers and petroleum refining sector. Economists are lined up on both sides of the debate, basing their analysis on the impact they expect BTAs to have on import and export prices across the economy as a whole, but differing in their assumptions regarding exchange rate effects.
A better way to assess the impacts of Border Tax Adjustments is to focus on what they would mean in terms of the financial performance of individual sectors of U.S. business. Direct tax effects on imports of intermediate goods and services, capital equipment, and consumer products all need to be taken into account, in addition to the secondary impacts that would arise if businesses were to respond by passing higher costs along to their customers.
The impacts of Border Tax Adjustments on U.S. business are both more complex and more costly than those projected simply by applying a 20 per cent surcharge to the balance of trade. Cost impacts on business could be as much as 41 per cent higher than the amount of tax actually collected by government.
Border Tax Adjustments would create both winners and losers among industry sectors. Wholesale exporters, manufacturers of machinery, equipment, and chemical products, airlines, motion picture and recording studios, and professional, technical, software, computer, Internet, leasing, and legal services all stand to benefit from significant tax savings (as long as BTAs were applied to exports and imports of goods and services alike).
There would be some big losers as well. Retailers and domestic wholesalers could see the cost of the goods they purchase for resale leap by as much as 8.9 per cent. However, they are not the only industries that would be negatively affected by BTAs. The construction industry, petroleum refiners, and automotive manufacturers would also see sizeable losses. So too would utilities, telecommunications firms, hospitals and health care services, insurance companies, and the food and beverage services sector.
Ultimately, the economic consequences of Border Tax Adjustments would depend on how businesses respond to potential tax savings or operating losses.
Companies benefiting from tax savings would most likely retain those funds to boost profit performance. Other firms would need to manage potential cost increases by improving productivity, reconfiguring supply chains, or raising prices for their customers.
It is highly unlikely that Border Tax Adjustments would lead to major restructuring across industry supply chains, except in the retail sector where offshore producers would be most vulnerable to large merchandisers switching to lower cost sources of supply.
Expectations that BTAs would lead to a widespread repatriation of manufacturing investment and jobs back to the United States are also overblown. Many manufacturers would face even higher costs in relocating production facilities and experience difficulties in sourcing equivalent competitively priced goods, services, or technologies from U.S. suppliers. BTAs are more likely to affect future rather than current investments decisions.
In the short-term, most companies would be more likely to pass higher costs along to their customers. Consumers would ultimately pay the price. BTAs could increase the price of consumer goods by as much as 4.8 per cent and push the U.S. Consumer Price Index up by 2.0 per cent. In that event, real consumer spending would fall by as much as 1.8 per cent. Real business investment in equipment could also contract by as much as 6.3 per cent.
Other fiscal measures would be required to prevent a slowdown in economic growth. The cost of those measures would be higher for government than the taxes collected from Border Tax Adjustments themselves.